What Factors Affect a Workers’ Compensation Premium?
Workers’ comp premiums are based on a business’s payroll, the job classifications of its employees, and its claims history.
Payroll
Because workers’ comp can provide wage replacement after a job-related injury or illness, payroll is a key metric for determining a premium. Businesses need a certain amount of workers’ comp for every $100 in payroll.
Classifications
Depending on the state, a state rating bureau or the National Council on Compensation Insurance (NCCI) assigns class codes based on the type of work each employee does. The differences are based on the risk of injury for a specific job type. For example, the cost of workers’ comp is higher for landscapers or electricians than for office workers.
Claims history
Rating bureaus calculate experience ratings, which factor into premiums. Businesses with safer work environments can expect to pay less for insurance.
How it works
An experience rating modification is a method of predicting the risk of future injuries for a given company. It is a rate multiplier based on a business’s claims experience and loss history.
- An average level of risk is a rating of 1.0.
- A rating below 1.0 shows that a company has a better claims history than average.
- A rating above 1.0 indicates that it has a worse claims history than average.
These factors can affect a business’s experience rating:
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Rate of loss among employees
A company with fewer employees and more injuries will have a higher rate than a company with more employees and fewer injuries. -
Frequency of loss
A company with multiple injuries in a ten-year period will have a higher rate than a company with fewer injuries in the same time span. -
Safety measures
An injury resulting from a lapse in safety can result in a higher experience modification factor, which leads to higher premiums.
Some insurance carriers use retrospective rating, which calculates a premium based on the actual losses in that policy period.
How it works
Under a retrospective rating plan, a business pays an estimated premium at the beginning of the policy period. At the end of the period, the insurance company refunds or bills the business based on the incurred losses that year.
Other premium adjustments
Some insurance companies may offer other types of premium adjustments. For example, a business can receive merit credits for favorable conditions, such as safety training or on-site medical services. Additionally, insurers with a history of controlling costs may charge lower administrative fees.
Some insurers also reduce the cost of workers’ compensation insurance by returning dividends to their policyholders.
Premium auditing
Throughout the year, employees can freely join or leave a company, causing the company’s payroll to change. As a result, the premium cost is not set in stone at the start of the policy period. At the end of the policy period, the business’s agent or insurance carrier will conduct a premium audit. The actual premium cost for the year is due based on this actual payroll.
An independent agent can help small business owners understand their insurance needs.